When trucking companies are stung by rising costs, third-party logistics providers share their pain, very quickly. Rising transportation costs are putting more pressure on net margins at 3PLs as well as carriers, as they balance what they pay truckers and what they can charge shippers. At the same time, freight volumes are increasing on the roads and rails, driving revenue higher for non-asset logistics companies.
For logistics providers increasingly critical to shippers managing multimodal supply chains and to trucking companies seeking new ways to deliver value-added services as well as freight, 2012 promises to be a challenging year.
3PLs walk a tightrope between rising expenses and the opportunity for explosive growth as supply chains become more complex and costly. And, overall, they still enjoy healthy margins, although they may wish they were wider, or just as wide as they were last year.
Take, for example, C.H. Robinson, the nation’s largest 3PL and truck freight broker. The Minneapolis-based company said its transportation net revenue margin declined in the first quarter even as its transportation net revenue increased 7.1 percent. Truckload volume was up 8 percent year-over-year and less-than-truckload shipments, 13 percent, bolstering that increase in transportation revenue.
“There are a lot of things and a lot of forces that end up being reflected in our net revenue margins, including fuel, timing and pricing changes” as supply and demand fluctuate, C.H. Robinson CEO John P. Wiehoff told investment analysts in an April 24 first quarter earnings conference call.
The 3PL’s truckload net revenue margin narrowed year-over-year because its cost per mile rose faster than its price per mile, and because of the high cost of fuel. The truckload rates C.H. Robinson charged customers rose 1 percent year-over-year in the quarter, excluding fuel surcharges, but the company said its truckload costs increased 2 percent.
“We are in a part of the cycle where a tightening market causes our net revenue margin to decrease,” Wiehoff said. “The truckload market is tightening, and that caused truck pricing to rise.” Truck rates also can change quickly, which may be a problem for a third party if its rates are set by a long-term shipper contract.
More than half of the freight C.H. Robinson handles for customers moves under some type of pre-established pricing agreement, Wiehoff said. “When the market starts to tighten, we generally see the cost of hire increase pretty quickly,” he said.
In the truckload market, which represents the largest share of the for-hire trucking business, rates have increased substantially since the recession, though carriers say rising costs are narrowing their margins as well (Story, page 32). Truckload pricing was 7.2 percent higher in March than a year earlier, though down slightly from recent months, according to the most recent Cass Truckload Linehaul Index. The index has been rising year-over-year each month since September 2010, hitting its highest point in August 2011, according to Cass Information Systems.
Overall, truck tonnage appears to be growing moderately, and more slowly, according to the American Trucking Associations. In March, for-hire truck tonnage increased 2.7 percent year-over-year, according to the ATA, the smallest year-over-year monthly increase since December 2009. In 2011 and 2010, for-hire truck tonnage increased 5.8 percent on average.
Still, C.H. Robinson’s truckload volume shot up in March and April, climbing 10 percent last month through April 24. That robust volume gain could indicate shippers are turning in greater numbers to C.H. Robinson and other 3PLs as they search for adequate truck capacity.
Wiehoff said the volume growth in April tracked the trends of the last few quarters: tightening capacity, higher volume and narrowing margins. C.H. Robinson’s net margin may decrease as truckload capacity tightens, but the company’s net profit is still rising at a healthy pace — 9.8 percent year-over-year in the first quarter to $106.5 million on a 7.9 percent increase in revenue to $2.6 billion.
That’s a more temperate growth rate, however, than the 15.5 percent increase in net profit in 2011’s first quarter, when C.H. Robinson had a $97 million profit. Year-over-year comparisons in 2012 are tougher, however, because of the progress 3PLs and motor carriers made in 2010 and 2011 recovering revenue lost in the recession.
There’s still plenty of room for growth, for large players and smaller 3PLs and freight brokers. Echo Global Logistics and Coyote Logistics, two 3PLs on the verge of becoming billion-dollar companies, didn’t exist six years ago. Since 2006, publicly traded Echo Global’s revenue soared from $33 million to nearly $603 million in 2011. The company expects revenue to hit $740 million to $780 million in 2012.
Commentary: 3PLs Finding Success in the RFP Process.
In the first quarter, Echo’s total revenue was up 30.2 percent to $168.6 million, while net profit rose 47.8 percent to $3.3 million. Shipments were up 21.9 percent, and the number of enterprise clients, those with logistics contracts compared with transactional clients, rose 20.1 percent and now accounts for 31.3 percent of Echo’s total revenue. The Chicago-based company’s net revenue margin, however, dipped from
19.7 percent in the first quarter of 2011 to 19.4 percent, a sign of rising costs.
“We have a significant opportunity to grow share within a very large market,” one that is far from being tapped, CEO Douglas R. Waggoner told analysts in February. Echo’s goal is to reach $1.3 billion to $1.5 billion in revenue over the next five years.
Plenty of smaller companies share Waggoner’s enthusiasm, based on increased shipper demand for 3PL services. Logistics spending by shippers in 2010 jumped $114 billion to an estimated $1.2 trillion, according to the Council of Supply Chain Management Professionals’ 2011 State of Logistics report. Fortune 100 and Fortune 500 businesses continue to outsource more transportation to logistics operators, using multiple 3PLs in a complex array of domestic and international networks.
How much shippers will outsource in 2012 depends on the difficult-to-gauge economic recovery. Forecasts for tight capacity over the past two years failed to materialize, in part because 3PLs were successful in helping shippers find space for truck freight, increasingly on intermodal rail. In April, 3PLs were looking at a transportation market that seemed poised again for growth, but how fast?
“It’s too early to know what the depth of the tightening is going to be,” Wiehoff said. “The sort of mode we’re in right now is waiting to see how the next couple of months play out.”